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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 1, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-43089
THE GSI GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 37-0856587
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1004 E. ILLINOIS STREET, ASSUMPTION, ILLINOIS 62510
(Address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer: Yes
[ ] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. Common stock, par
value $0.01 per share, 826,948 shares outstanding as of November 8, 2004.
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1
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds *
Item 3. Defaults Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 21
* No response to this item is included herein for the reason that it is
inapplicable.
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
OCTOBER 1, DECEMBER 31,
ASSETS 2004 2003
- ---------------------------------------------------------------------------- ------------ --------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . $ 2,239 $ 3,439
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . 42,226 27,083
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,355 54,165
Prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,225 4,468
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,937 2,882
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 101,982 92,037
------------ --------------
Property, Plant and Equipment, net . . . . . . . . . . . . . . . . . . . . . 31,588 32,673
------------ --------------
Other Assets:
Goodwill and other intangible assets, net. . . . . . . . . . . . . . . . . 11,775 12,243
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,461 1,077
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,718 2,881
------------ --------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 15,954 16,201
------------ --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149,524 $ 140,911
============ ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ----------------------------------------------------------------------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,565 $ 17,139
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,252 1,751
Payroll and payroll related expenses . . . . . . . . . . . . . . . . . . . 6,351 3,071
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . 6,433 3,697
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,614 8,875
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . 5,422 148
------------ --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 48,637 34,681
------------ --------------
Long-Term Debt, less current maturities. . . . . . . . . . . . . . . . . . . 132,812 129,563
------------ --------------
Commitments and Contingencies
Stockholders' Deficit:
Common stock, $.01 par value, voting (authorized 6,900,000 shares; issued
6,633,652 shares; outstanding 626,948 shares at October 1, 2004 and
1,575,000 shares at December 31, 2003 ). . . . . . . . . . . . . . . . . 16 16
Common stock, $.01 par value, nonvoting (authorized 1,100,000 shares;
issued 1,059,316 shares; outstanding 200,000 shares) . . . . . . . . . . 2 2
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,006 3,006
Accumulated other comprehensive loss (cumulative currency translation
adjustment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,257) (11,929)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,867 12,531
Treasury stock, at cost, voting (6,006,704 shares at October 1, 2004 and
5,058,652 shares at December 31, 2003) . . . . . . . . . . . . . . . . . (41,550) (26,950)
Treasury stock, at cost, nonvoting (859,316 shares). . . . . . . . . . . . (9) (9)
------------ --------------
Total stockholders' deficit. . . . . . . . . . . . . . . . . . . . . . (31,925) (23,333)
------------ --------------
Total liabilities and stockholders' deficit. . . . . . . . . . . . . . $ 149,524 $ 140,911
============ ==============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE FISCAL MONTHS ENDED NINE FISCAL MONTHS ENDED
------------------------- ------------------------
OCT. 1, SEPT. 26, OCT. 1, SEPT. 26,
2004 2003 2004 2003
--------- ----------- ----------- -----------
Sales $ 89,856 $ 77,270 $ 228,345 $ 187,233
Cost of sales 68,315 59,421 181,654 147,183
--------- ----------- ----------- -----------
Gross profit . . . . . . . . . . . . . . 21,541 17,849 46,691 40,050
Selling, general and administrative expenses 9,832 9,924 26,885 27,474
Amortization expense . . . . . . . . . . . . 163 236 487 859
--------- ----------- ----------- -----------
Total operating expenses . . . . . . . . . 9,995 10,160 27,372 28,333
--------- ----------- ----------- -----------
Operating income . . . . . . . . . . . . . . 11,546 7,689 19,319 11,717
Other expense:
Interest expense . . . . . . . . . . . . . (3,940) (3,239) (10,454) (9,414)
Other, net . . . . . . . . . . . . . . . . (822) 112 (1,331) (533)
--------- ----------- ----------- -----------
Income before income tax expense . . . . 6,784 4,562 7,534 1,770
Income tax expense . . . . . . . . . . . . . 104 212 448 400
--------- ----------- ----------- -----------
Net income . . . . . . . . . . . . . . . $ 6,680 $ 4,350 $ 7,086 $ 1,370
--------- ----------- ----------- -----------
Basic and diluted income per share . . . . . $ 8.08 $ 2.45 $ 4.85 $ 0.77
--------- ----------- ----------- -----------
Weighted average common shares outstanding . 826,948 1,775,000 1,461,281 1,775,000
========= =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
THE GSI GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE FISCAL MONTHS ENDED
--------------------------
OCT. 1, SEPT. 26,
2004 2003
-------------------------- -----------
Cash Flows From Operating Activities:
Depreciation and amortization expense . . . . . . . . . . . . . . 3,937 4,859
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,430 1,758
-------------------------- -----------
Net cash flows provided by operating activities . . . . . 9,367 6,617
-------------------------- -----------
Cash Flows From Investing Activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . (3,415) (1,167)
Proceeds from sale of fixed assets. . . . . . . . . . . . . . . . 870 993
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) 499
-------------------------- -----------
Net cash flows provided by (used in) investing activities (2,552) 325
-------------------------- -----------
Cash Flows From Financing Activities:
Proceeds from shareholder loan. . . . . . . . . . . . . . . . . 5,816 1,216
Payments on shareholder loan. . . . . . . . . . . . . . . . . . (970) (1,991)
Payments on long-term debt. . . . . . . . . . . . . . . . . . . . -- (2,006)
Net (payments) borrowings under line of credit agreement. . . . . 3,561 (3,574)
Purchase of Treasury Stock. . . . . . . . . . . . . . . . . . . (14,600) --
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . (750) (959)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,090) 486
-------------------------- -----------
Net cash flows used in financing activities . . . . . . . (8,033) (6,828)
-------------------------- -----------
Effect of Exchange Rate Changes on Cash . . . . . . . . . . . . . . 18 256
-------------------------- -----------
Increase (Decrease) In Cash and Cash Equivalents. . . . . . . . . . $ (1,200) $ 370
Cash and Cash Equivalents, beginning of period. . . . . . . . . . . 3,439 2,936
-------------------------- -----------
Cash and Cash Equivalents, end of period. . . . . . . . . . . . . . $ 2,239 $ 3,306
========================== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
THE GSI GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared by The GSI Group, Inc.
(the "Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
not misleading. These financial statements should be read in conjunction with
the financial statements and related notes contained in the Company's December
31, 2003 Form 10-K as filed with the Securities and Exchange Commission. Other
than as indicated herein, there have been no significant changes from the data
presented in said 10-K.
In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial position of the Company as
of October 1, 2004 and the results of operations for the nine months ended
October 1, 2004 and cash flows for the nine months ended October 1, 2004. Those
adjustments consist only of normal recurring adjustments.
The results of operations for the nine-month period ended October 1, 2004
are not necessarily indicative of the operating results for the full year.
2. COMPREHENSIVE INCOME
The components of comprehensive income for the periods presented are
as follows (in thousands):
October 1, September 26,
2004 2003
------------ --------------
Net income . . . . . . . . . . . . . . . . $ 7,086 $ 1,370
Cumulative currency translation adjustment (328) 2,100
Comprehensive income . . . . . . . . . . $ 6,758 $ 3,470
============ ==============
3. DETAIL OF CERTAIN ASSETS
OCTOBER 1, DECEMBER 31,
2004 2003
----------- -------------
(IN THOUSANDS)
Inventories
Raw materials. . $ 19,153 $ 13,940
Work-in-process. 8,752 18,443
Finished goods . 24,450 21,782
----------- -------------
Total . . . $ 52,355 $ 54,165
=========== =============
4. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $6.9 million and $6.5 million in interest
during the nine months ended October 1, 2004 and September 26, 2003. The
Company paid no income taxes during the first nine months of 2004 and 2003.
6
5. LONG-TERM DEBT
The indenture governing the Company's senior subordinated notes contains
certain restrictive covenants. The more significant of the covenants restrict
the ability of the Company to dispose of assets, incur additional indebtedness,
pay dividends or make distributions and other payments affecting subsidiaries.
The Company was in compliance with the covenants under the indenture as of
October 1, 2004.
The Credit Facility with Congress Financial Corporation (Central)
requires the Company to maintain a senior debt to EBITDA ratio and a fixed
charge coverage ratio. Borrowings under the Credit Facility are secured by
substantially all of the assets of the Company, including the capital stock of
any existing or future subsidiaries, except the Brazilian subsidiary. The
Company had $29.2 million of availability on the line as of October 1, 2004.
On July 9, 2004, Congress Financial Corporation and the Company amended the
existing credit facility (the "Credit Facility") to provide for term loans up to
a maximum of $20.8 million, as well as to increase the Sloan Participation
Obligations set forth therein from $2.5 million to $5.0 million. Proceeds from
the increased term loan were used to purchase Voting Common Stock from Craig
Sloan upon his retirement. A Capital Call Agreement was also signed on this
date requiring Mr. Sloan to invest in the Company, if Excess Availability, as
defined in the Credit Facility, falls below $5.0 million, in an amount that
causes such availability to be at least $10.0 million.
On October 19, 2004, Congress Financial Corporation and the Company amended
the existing credit facility (the "Credit Facility") to decrease the interest
rate on the term note by 1.25% and to provide for a revolving feature where the
line can be between $8.0 million and $17.5 million for the period between
October 19, 2004 and April 19, 2005.
Subsequent to October 1, 2004, the Company purchased a building and
manufacturing equipment from a company controlled by a shareholder of the
Company for $2.3 million. The Company was previously leasing the building and
manufacturing equipment from a company controlled by a shareholder.
6. COMMITMENTS AND CONTINGENCIES
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.
The Company has a contract with the Yemen Company for Industrial
Development to manufacture and supervise the assembly of grain handling systems.
Other current assets include $1.0 million of retainage withheld until completion
of the project and the meeting of certain performance criteria.
The Company has a contract with BMA Consulting, Inc., which is owned by a
shareholder of the Company, to provide consulting services over the next 3 years
and to pay $0.7 million at the end of the period.
7. BUSINESS SEGMENT
The Company has no separately reportable segments in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information." Under the enterprise wide
disclosure requirements of SFAS 131, the Company reports sales by each product
line. Amounts for the first nine months of 2004 and 2003 are as shown in the
table below (in thousands).
OCT. 1, SEPT. 26,
2004 2003
-------- ----------
Grain product line . $146,737 $ 116,037
Swine product line . 34,207 31,568
Poultry product line 47,401 39,628
-------- ----------
Sales . . . . . $228,345 $ 187,233
======== ==========
For the first nine months of 2004 and 2003, sales in Brazil were $20.2
million and $12.4 million, respectively. Long-lived assets in Brazil were $3.9
million at October 1, 2004.
7
8. GUARANTOR SUBSIDIARIES
The Company's payment obligation under the senior subordinated notes are
fully and unconditionally guaranteed on a joint and several basis by
GSI/Cumberland de Mexico S. de R.L. de C.V., The GSI Group (Europe) Ltd., The
GSI Group Poland Sp. z.o.o. The GSI Group (Africa) (Pty) Ltd., GSI Group (Asia)
Sdn. Bhd., Agromarau Industria e Comercio Ltda., The GSI Group (Shanghai) Ltd.,
and The GSI Group (Canada) Inc. (the "Guarantor Subsidiaries"). The Guarantor
Subsidiaries are direct wholly owned subsidiaries of the Company. The
obligations of the Guarantor Subsidiaries under their guarantees are
subordinated to such subsidiaries' obligations under their guarantee of the
Credit Facility.
Presented below is unaudited condensed consolidating financial information
for The GSI Group, Inc. ("Parent Company") and the Guarantor Subsidiaries. In
the Company's opinion, separate financial statements and other disclosures
concerning the Guarantor Subsidiaries would not provide additional information
that is material to investors.
Investments in subsidiaries are accounted for by the Parent Company using
the equity method of accounting. Earnings of subsidiaries are, therefore,
reflected in the Parent Company's investments in and advances to/from
subsidiaries' accounts and earnings. The elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
During July 2004, the Company dissolved the legal entity known as David
Manufacturing Company (DMC). The dissolution of DMC had no impact on earnings.
GSI continues to sell under the DMC brand name.
8
8. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 1, 2004
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 94 $ 2,145 $ -- $ 2,239
Accounts receivable, net. . . . . . . . . . . . . 37,827 8,228 (3,829) 42,226
Inventories, net. . . . . . . . . . . . . . . . . 42,077 10,278 -- 52,355
Other current assets. . . . . . . . . . . . . . . 2,840 2,963 (641) 5,162
--------- -------------- -------------- --------------
Total current assets . . . . . . . . . . . . . . . . 82,838 23,614 (4,470) 101,982
Property, plant and equipment, net . . . . . . . . . 26,975 4,613 -- 31,588
Goodwill and other intangible assets, net. . . . . . 8,534 3,241 -- 11,775
Investment in and advances to/from subsidiaries. . . 32,752 (2,129) (30,623) --
Deferred taxes . . . . . . . . . . . . . . . . . . . -- 1,461 -- 1,461
Other long-term assets . . . . . . . . . . . . . . . 2,716 2 -- 2,718
--------- -------------- -------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . $153,815 $ 30,802 $ (35,093) $ 149,524
========= ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 4,994 $ 428 $ -- $ 5,422
Accounts payable. . . . . . . . . . . . . . . . . 13,082 8,312 (3,829) 17,565
Accrued liabilities . . . . . . . . . . . . . . . 22,595 3,696 (641) 25,650
--------- -------------- -------------- --------------
Total current liabilities. . . . . . . . . . . . . . 40,671 12,436 (4,470) 48,637
Long-term debt . . . . . . . . . . . . . . . . . . . 132,812 7,838 (7,838) 132,812
--------- -------------- -------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . 173,483 20,274 (12,308) 181,449
Stockholders' equity (deficit):
Common stock. . . . . . . . . . . . . . . . . . . 18 22,196 (22,196) 18
Additional paid-in capital. . . . . . . . . . . . 3,006 505 (505) 3,006
Accumulated other comprehensive loss. . . . . . . -- (12,257) -- (12,257)
Retained earnings . . . . . . . . . . . . . . . . 18,867 84 (84) 18,867
Treasury stock, at cost . . . . . . . . . . . . . (41,559) -- -- (41,559)
--------- -------------- -------------- --------------
Total stockholders' equity (deficit) . . . . . . . . (19,668) 10,528 (22,785) (31,925)
--------- -------------- -------------- --------------
Total liabilities and stockholders' equity (deficit) $153,815 $ 30,802 $ (35,093) $ 149,524
========= ============== ============== ==============
9
8. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE FISCAL MONTHS ENDED OCTOBER 1, 2004
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales. . . . . . . . . . . . . . . . . . . . . $ 83,541 $ 9,999 $ (3,684) $ 89,856
Cost of sales. . . . . . . . . . . . . . . . . 65,597 6,414 (3,696) 68,315
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . 17,944 3,585 12 21,541
Selling, general and administrative expenses . 7,769 2,226 -- 9,995
--------- -------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . 10,175 1,359 12 11,546
Interest expense . . . . . . . . . . . . . . . (3,883) (57) -- (3,940)
Other income (expense) . . . . . . . . . . . . (825) 3 -- (822)
--------- -------------- -------------- --------------
Income before income taxes . . . . . . . . . . 5,467 1,305 12 6,784
(Benefit) provision for income taxes . . . . . (183) 287 -- 104
--------- -------------- -------------- --------------
Income before equity in income of
Consolidated subsidiaries. . . . . . . . . . . 5,650 1,018 12 6,680
Equity in income of consolidated subsidiaries. 1,018 -- (1,018) --
--------- -------------- -------------- --------------
Net income . . . . . . . . . . . . . . . . . . $ 6,668 $ 1,018 $ (1,006) $ 6,680
========= ============== ============== ==============
10
8. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE FISCAL MONTHS ENDED OCTOBER 1, 2004
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales. . . . . . . . . . . . . . . . . . . . . $200,311 $ 37,128 $ (9,094) $ 228,345
Cost of sales. . . . . . . . . . . . . . . . . 165,157 25,591 (9,094) 181,654
--------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . 35,154 11,537 -- 46,691
Selling, general and administrative expenses . 19,174 8,198 -- 27,372
--------- -------------- -------------- --------------
Operating income . . . . . . . . . . . . . . . 15,980 3,339 -- 19,319
Interest expense . . . . . . . . . . . . . . . (10,379) (75) -- (10,454)
Other income (expense) . . . . . . . . . . . . (1,376) 45 -- (1,331)
--------- -------------- -------------- --------------
Income before income taxes . . . . . . . . . . 4,225 3,309 -- 7,534
(Benefit) provision for income taxes . . . . . (188) 636 -- 448
--------- -------------- -------------- --------------
Income before equity in income of
Consolidated subsidiaries. . . . . . . . . . . 4,413 2,673 -- 7,086
Equity in income of consolidated subsidiaries. 2,673 -- (2,673) --
--------- -------------- -------------- --------------
Net income . . . . . . . . . . . . . . . . . . $ 7,086 $ 2,673 $ (2,673) $ 7,086
========= ============== ============== ==============
11
8. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
THREE FISCAL MONTHS ENDED SEPTEMBER 26, 2003
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . $ 64,710 $ 15,025 $ (2,465) $ 77,270
Cost of sales . . . . . . . . . . . . . . . . 50,134 12,343 (3,056) 59,421
--------- -------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . 14,576 2,682 591 17,849
Selling, general and administrative expenses. 7,920 2,240 -- 10,160
--------- -------------- -------------- --------------
Operating income. . . . . . . . . . . . . . . 6,656 442 591 7,689
Interest expense. . . . . . . . . . . . . . . (3,226) (13) -- (3,239)
Other income. . . . . . . . . . . . . . . . . 24 88 -- 112
--------- -------------- -------------- --------------
Income before income taxes. . . . . . . . . . 3,454 517 591 4,562
Provision for income taxes. . . . . . . . . . -- 212 -- 212
--------- -------------- -------------- --------------
Income before equity in income of
Consolidated subsidiaries . . . . . . . . . . 3,454 305 591 4,350
Equity in income of consolidated subsidiaries 305 -- (305) --
--------- -------------- -------------- --------------
Net loss. . . . . . . . . . . . . . . . . . . $ 3,759 $ 305 $ 286 $ 4,350
========= ============== ============== ==============
12
8. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
NINE FISCAL MONTHS ENDED SEPTEMBER 26, 2003
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- -------------- --------------
Sales . . . . . . . . . . . . . . . . . . . . $160,259 $ 35,401 $ (8,427) $ 187,233
Cost of sales . . . . . . . . . . . . . . . . 127,305 28,171 (8,293) 147,183
--------- -------------- -------------- --------------
Gross profit. . . . . . . . . . . . . . . . . 32,954 7,230 (134) 40,050
Selling, general and administrative expenses. 20,203 8,130 -- 28,333
--------- -------------- -------------- --------------
Operating income (loss) . . . . . . . . . . . 12,751 (900) (134) 11,717
Interest expense. . . . . . . . . . . . . . . (9,379) (35) -- (9,414)
Other expense . . . . . . . . . . . . . . . . (447) (86) -- (533)
--------- -------------- -------------- --------------
Income (loss) before income taxes . . . . . . 2,925 (1,021) (134) 1,770
Provision for income taxes. . . . . . . . . . 2 398 -- 400
--------- -------------- -------------- --------------
Income (loss) before equity in income of
Consolidated subsidiaries . . . . . . . . . . 2,923 (1,419) (134) 1,370
Equity in loss of consolidated subsidiaries . (1,419) -- 1,419 --
--------- -------------- -------------- --------------
Net income (loss) . . . . . . . . . . . . . . $ 1,504 $ (1,419) $ 1,285 $ 1,370
========= ============== ============== ==============
13
8. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE FISCAL MONTHS ENDED OCTOBER 1, 2004
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows provided by operating activities. . . . . . . . . $ 2,981 $ 6,386 $ -- $ 9,367
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (1,128) (1,417) -- (2,545)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,812 (7,819) -- (7)
--------- -------------- ------------- --------------
Net cash provided by (used in) investing activities. . . . . 6,684 (9,236) -- (2,552)
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net payments on debt . . . . . . . . . . . . . . . . . . . . 7,619 788 -- 8,407
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,295) 855 -- (16,440)
--------- -------------- ------------- --------------
Net cash provided by (used in) financing activities. . . . . (9,676) 1,643 -- (8,033)
--------- -------------- ------------- --------------
Effect of exchange rate changes on cash. . . . . . . . . . . -- 18 -- 18
--------- -------------- ------------- --------------
Change in cash and cash equivalents. . . . . . . . . . . . . (11) (1,189) -- (1,200)
Cash and cash equivalents, beginning of period . . . . . . . 105 3,334 -- 3,439
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period . . . . . . . . . . $ 94 $ 2,145 -- $ 2,239
========= ============== ============= ==============
14
8. GUARANTOR SUBSIDIARIES (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE FISCAL MONTHS ENDED SEPTEMBER 26, 2003
(IN THOUSANDS)
Parent Guarantor
Company Subsidiaries Eliminations Consolidated
--------- -------------- ------------- --------------
Cash flows provided by operating activities. . . . . . . . . $ 2,236 $ 4,381 $ -- $ 6,617
--------- -------------- ------------- --------------
Cash flows from investing activities:
Capital expenditures and proceeds from sales of fixed assets (418) (749) -- (1, 167)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,719 (2,227) -- 1,492
--------- -------------- ------------- --------------
Net cash provided by (used in) investing activities. . . . . 3,301 (2,976) -- 325
--------- -------------- ------------- --------------
Cash flows from financing activities:
Net payments on debt . . . . . . . . . . . . . . . . . . . . (3,939) (2,416) -- (6,355)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,544) 1,071 -- (473)
--------- -------------- ------------- --------------
Net cash used in financing activities. . . . . . . . . . . . (5,483) (1,345) -- (6,828)
--------- -------------- ------------- --------------
Effect of exchange rate changes on cash. . . . . . . . . . . -- 256 -- 256
--------- -------------- ------------- --------------
Change in cash and cash equivalents. . . . . . . . . . . . . 54 316 -- 370
Cash and cash equivalents, beginning of period . . . . . . . 205 2,731 -- 2,936
--------- -------------- ------------- --------------
Cash and cash equivalents, end of period . . . . . . . . . . $ 259 $ 3,047 -- $ 3,306
========= ============== ============= ==============
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the notes included in Item 1 hereof.
GENERAL
The Company is a leading manufacturer and supplier of agricultural
equipment and services worldwide. The Company's grain, swine and poultry
products are used by producers and purchasers of grain, and by producers of
swine and poultry. Fluctuations in grain and feed prices directly impact sales
of the Company's grain equipment. Because the primary cost of producing swine
and poultry is the cost of the feed grain consumed by animals, fluctuations in
the supply and cost of grain to users of the Company's products in the past has
impacted sales of the Company's swine and poultry equipment. The Company
believes, however, that its diversified product offerings mitigate some of the
effects of fluctuations in the price of grain since the demand for grain
storage, drying and handling equipment tends to increase during periods of
higher grain prices, which somewhat offsets the reduction in demand during such
periods for the Company's products by producers of swine and poultry.
Sales of agricultural equipment are seasonal, with farmers traditionally
purchasing grain storage bins and grain drying and handling equipment in the
summer and fall in conjunction with the harvesting season, and swine and poultry
producers purchasing equipment during prime construction periods in the spring,
summer and fall. The Company's net sales and net income have historically been
lower during the first and fourth fiscal quarters as compared to the second and
third quarters.
Although the Company's sales are primarily denominated in U.S. dollars and
are not generally affected by currency fluctuations (except for the Company's
Brazilian and South African operations), the production costs, profit margins
and competitive position of the Company are affected by the strength of the U.S.
dollar relative to the strength of the currencies in countries where its
products are sold.
The Company's international sales have historically comprised a significant
portion of net sales. In the first nine months of both 2004 and 2003, the
Company's international sales accounted for 26% of net sales. International
operations generally are subject to various risks that are not present in
domestic operations, including restrictions on dividends, restrictions on
repatriation of funds, unexpected changes in tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, political instability,
fluctuations in currency exchange rates, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity and
potentially adverse tax consequences, any of which could adversely impact the
Company's international operations.
The primary raw materials used by the Company to manufacture its products
are steel and polymers. Fluctuations in the prices and availability of vendors
for steel and, to a lesser extent, polymer materials can impact the Company's
cost of sales. Recent sharp increases in the price of steel have forced the
Company to pass along price increases to its customers, which may affect future
demand. In addition, the Company may be unable to recover the full amount of
these steel price increases from its customers.
On July 1, 2004, Craig Sloan retired as the Chief Executive Officer of The
GSI Group, Inc. (the "Company"). On July 8, 2004, Mr. Sloan and the Company
entered into a Severance, Non-Compete and Consulting Agreement providing the
terms and conditions of Mr. Sloan's retirement and establishing a three-year
period (subject to extension) during which Mr. Sloan will act as a consultant to
the Company. Pursuant to that agreement, the Company also repurchased a portion
of Mr. Sloan's common stock. Mr. Sloan is continuing to serve as a director of
the Company and as the non-executive Chairman of the Board. Upon Mr. Sloan's
retirement, the Board of Directors elected Russell C. Mello as Chief Executive
Officer of the Company.
The Company currently operates as a subchapter S corporation and,
accordingly, is not subject to federal income taxation for the periods for which
financial information has been presented herein. Because the Company's
stockholders are subject to tax liabilities based on their pro rata shares of
the Company's income, the Company's policy is to make periodic distributions to
its stockholders in amounts equal to such tax liabilities.
16
RESULTS OF OPERATIONS
Three Months Ended October 1, 2004 Compared to Three Months Ended September 26,
2003
Sales increased 16.3% or $12.6 million to $89.9 million in the third
quarter of 2004 compared to $77.3 million in the third quarter of 2003. This
increase was driven by increased demand for the Company's grain and poultry
products.
Gross profit increased to $21.5 million in the third quarter of 2004 or
24.0% of sales from $17.8 million or 23.0% of sales in the same period of 2003.
This increase was primarily a result of increased sales.
Operating expenses decreased 1.6% or $0.2 million to $10.0 million in the
third quarter of 2004 from $10.2 million in the same period of 2003. This
decrease was primarily the result of cost cutting measures.
Operating income increased to $11.5 million in the third quarter of 2004
from $7.7 million in the third quarter of 2003. This increase was primarily
attributable to the increase in gross profit.
Interest expense increased $0.7 million in the third quarter of 2004 as
compared to the third quarter of 2003 due to higher borrowing costs.
Net income increased $2.3 million to $6.7 million for the third quarter of
2004 from $4.4 million in the same period of 2003.
Nine Months Ended October 1, 2004 Compared to Nine Months Ended September 26,
2003
Sales increased 22.0% or $41.1 million to $228.3 million in the first nine
months of 2004 compared to $187.2 million in the first nine months of 2003.
This increase was driven by increased demand for essentially all of the
Company's products.
Gross profit increased to $46.7 million in the first nine months of 2004 or
20.5% of sales from $40.1 million or 21.4% of sales in the same period of 2003.
This increase was a result of increased sales. The decrease in gross profit as
a percent of sales was primarily the result of higher material costs.
Operating expenses decreased 3.4% or $0.9 million to $27.4 million in the
first nine months of 2004 from $28.3 million in the same period of 2003. This
decrease was primarily the result of cost cutting measures.
Operating income increased substantially to $19.3 million in the first nine
months of 2004 from $11.7 million in the first nine months of 2003. This
increase was primarily attributable to the increase in gross profit.
Interest expense increased $1.0 million in the first nine months of 2004 as
compared to the first nine months of 2003 due to higher borrowing costs.
Net income increased $5.7 million to $7.1 million for the first nine months
of 2004 from $1.4 million in the same period of 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded capital expenditures, working capital
requirements, debt service, stockholder dividends and stock repurchases from
cash flow from its operations, augmented by borrowings made under various credit
agreements and the sale of the Company's 10 % senior subordinated notes.
As of October 1, 2004, the Company had $53.3 million of working capital, a
decrease of $4.0 million from working capital as of December 31, 2003. The
decrease in working capital was primarily due to increases in accrued expenses,
current maturities of long-term debt, and accounts payable of $13.9 million,
partially offset by increases in accounts receivable and decreases in cash,
prepaids, and inventory of $9.9 million.
Operating activities provided $9.4 million and $6.6 million in cash flow in
the first nine months of 2004 and 2003, respectively. This $2.8 million
increase in cash flow was primarily the result of an increase in net income,
accounts receivable, other current assets, accrued expenses, and customer
deposits of $16.6 million, partially offset by a decrease in depreciation and
amortization, accounts payable, deferred taxes and inventory of $14.5 million
compared to the first nine months of 2003.
Investing activities used $2.6 million and $0.3 million in cash flow in the
first nine months of 2004 and 2003, respectively. The cash was used primarily
for machinery and equipment purchases. The $2.9 million decrease in cash used
in investing activities was partially a result of higher proceeds from the sale
of fixed assets in 2003 compared to 2004.
17
Financing activities used $8.0 million and $6.8 million in cash flow in the
first nine months of 2004 and 2003, respectively. The cash was used primarily
for the purchase of treasury stock in 2004 and for payments on long-term debt in
2003.
The Company believes that existing cash, cash flow from operations and
available borrowings under the Credit Facility will be sufficient to support its
working capital, capital expenditures and debt service requirements for the
foreseeable future.
INFLATION
The Company believes that inflation has not had a material effect on its
results of operations or financial condition during recent periods.
CRITICAL ACCOUNTING POLICIES
There are no material changes to the critical accounting policies since
December 31, 2003.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by the use of terms such as "believes," "anticipates," "intends," or
"expects." Forward-looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from future
results expressed or implied by such statements, and such statements should not
be regarded as a representation the stated objectives will be achieved.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated with adverse changes in
interest rates and foreign currency exchange rates. The Company does not hold
any market risk sensitive instruments for trading purposes. At October 1, 2004,
principal exposed to interest rate risk was limited to $38.3 million in variable
rate debt. The Company measures its interest rate risk by estimating the net
amount by which potential future net earnings would be impacted by hypothetical
changes in market interest rates related to all interest rate sensitive assets
and liabilities. A 1% change in interest rates would have a $0.4 million impact
on the Company's results of operations.
At October 1, 2004, approximately 16.2% of sales were derived from
international operations with exposure to foreign currency exchange rate risk.
The Company mitigates its foreign currency exchange rate risk principally by
establishing local production facilities in the markets it serves and by
invoicing customers in the same currency as the source of the products. The
Company also monitors its foreign currency exposure in each country and
implements strategies to respond to changing economic and political
environments. The Company's exposure to foreign currency exchange rate risk
relates primarily to the financial position and the results of operations of its
Brazilian and South African subsidiaries. The Company's exposure to such
exchange rate risk as it relates to the Company's financial position and results
of operations would be adversely impacted by further devaluation of the
Brazilian Real per U.S. dollar and the South African Rand per U.S. dollar.
These amounts are difficult to accurately estimate due to factors such as the
inherent fluctuation of inter-company account balances, balance sheet accounts
and the existing economic uncertainty and future economic conditions in the
international marketplace.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures
which are designed to ensure that information required to be disclosed by the
Company in the reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
under the SEC's rules and forms. Based on an evaluation performed as of the end
of the period covered by this report, the Company's Chief Executive Officer and
Principal Accounting Officer have concluded that the disclosure controls and
procedures were effective to provide reasonable assurance of the achievement of
this objective.
There were no changes in the Company's internal controls over financial
reporting identified in the evaluation that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no legal proceedings pending against the Company, which, in the
opinion of management, would have a material adverse affect on the Company's
business, financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
A list of the exhibits included as part of this Form 10-Q is set
forth in the Index to Exhibits that immediately precedes such exhibits, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
The Company did not file any Current Reports on Form 8-K during its
fiscal quarter ended October 1, 2004.
20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
The GSI Group, Inc.
By: /s/ Ann Montgomery
--------------------
Vice President - Finance (Principal
Accounting Officer)
DATE: NOVEMBER 8, 2004
21
INDEX TO EXHIBITS
EXHIBIT
NO. DOCUMENT DESCRIPTION
--- --------------------
10.11 Amendment No. 2 and Limited Waiver to the October 31, 2003 Loan and
Security Agreement, dated October 19, 2004, between The GSI Group,
Inc., as borrower, and Congress Financial Corporation, as lender.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Accounting Officer.
32 Section 1350 Certification of Chief Executive Officer and Principal
Accounting Officer.
22